The retail investors and traders tracked by the AAII weekly sentiment survey continue to pull in their horns. The bears came in at 49% a 4% points increase from last week and the bulls were at 40%, a 6% increase from last week. Pulling back to provide some perspective, we’re still mired in no man’s land - neither optimistic nor pessimistic.

Similar to last week, the Investors Intelligence sentiment survey of newsletter editors was almost unchanged. There were 40.9% bulls, 28.4% bears and the rest neutral. The next test of sentiment is how it will react to a fall in stock prices. Will people throw in the towel? or persist in a new found optimism?

TED Spread
Although it was prominently featured everywhere just a few months ago, the TED spread has fallen off everyone’s radar now. After reaching a climax on October 10th, 2008 it has continuously fallen lower to reach levels that it was trading at in early August 2007:

It still has quite a ways to go to reach the multi-year lows of 15 but it is just another indicator returning to normal and signaling that the worst is over for the credit markets.

Volatility
The volatility index (CBOE’s VIX) continues to take one step forward, two steps back - slowly grinding lower. It gave up the 30 level again this week on its way lower. Mr. Market is remarkable, who would have every imagined that we would be seeing 30 as ‘low’? For a long term chart of the VIX and further details on what this means for the market, check out Volatility Continues To Melt Lower.

Options Sentiment
The ISEE (equity only) call put ratio was elevated for the whole week and for Friday it was 237 - meaning that for every 100 puts, retail option traders were purchasing 237 call options. To find an ISE sentiment index reading higher we have to go back more than 2 years to the last day of trading for the year on December 31st, 2007 when the ratio was 241 (and the S&P 500 closed at 1468.

Even so, I’d prefer to see more than a one day spike because the last time something similar happened, it turned out to be completely false. It was on March 9th when the ISE ratio doubled within a few days. But that was exactly when the market started this confounding rally. For that reason I’d prefer to see more than a few days of such extreme optimism.

The CBOE (equity only) put call ratio hasn’t confirmed the ISE optimism - which is another reason to not be jumpy. This week’s put call ratio was moderately higher but we didn’t see a significant change so the chart I showed in last week’s sentiment overview is still helpful.

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Note that the high in the ISEE equity index occurred despite the market being below recent highs. I decided to look at the track record of the market (represented by SPY) after the ISEE gets to 225 or higher. This is the seventh occurrence since the bear market began 10/2007.

ISEE high (>=225) within 1 day of new 30-day high:
===================================
05/05/2009 - 225 - up 3 more days (2.5%) then dropped marginally
05/16/2008 - 225 - up one more day (1%) then dumped (140->134)
12/26/2007 - 232 - immediately dumped (145->133)

Unfortunately, the ISEE data only goes back to 3/2006, so we can’t compare with the start of the previous bull market in 10/2002. The equity ISEE peaked at 250-280 in 2006 and 2007, but readings in the area we are in appear closer to neutral than bearish.

Jim, is this for equity only data? don’t think so. On the one hand, there is even less data for equity only but it strips out index/ETF data and provides a much cleaner perspective. There are so many ETFs out there that it does make a difference.

kenny, yes it does and I keep a lazy eye on it. Mentioned it in the May 9th sentiment overview last. But then again, InvesTech says that insiders are not that ’smart’ - and should be faded. So the fact that they are selling into this rally means that it is the real deal. This is the first time I’ve heard such a theory and the chart accompanying it does bear it out but still… strange. It merits more study.